The Urge to Merge

Could businesses rediscover an enthusiasm for mergers, which was largely lost after the last merger bubble burst in the run up to the financial crisis of 2008?

According to The Economist, some of the right conditions are in place. Interest rates remain very low, and most mergers are built on the back of borrowed money. At the same time (to the surprise of many) a lot of firms are sitting on vast cash reserves. Perhaps all that is needed now is the appetite for risk that is probably behind many of these bold moves, at least in the past.

The article goes on to argue that if merger activity does pick up, it is likely to involve the kind of cost-saving, margin-boosting deals that have been more normal since the financial crash. Oil-and-gas deals reached an all-time high last year, as companies furiously consolidated. Industries such as banking and professional services seem ripe for something similar. Many firms could become more focused by selling or spinning off non-core businesses. Retailers and makers of consumer packaged goods have already done plenty of this, but could do more.

Most deals in 2013 will probably be fairly small, designed to strengthen or fill a gap in the buyer’s existing operations. These are known as “plug and play”. The "megamerger" is probably still out of fashion, but don’t bet against them. The American Airlines and US Airways $11bn merger shows that they can happen (though this may be the last in the US aviation industry - here's a reminder on the recent BA and Iberian merger in Europe).

Some investors are hungry for more mergers. Those vast cash reserves provided valuable insurance in the aftermath of the financial crisis, but they have started to look wasteful – a form of opportunity cost for shareholders. Some hedge funds have begun to put pressure on companies like Apple with big cash piles, and the shares of cash-rich companies that spend some of that money on M&A have outperformed the stock market in the past couple of years.

This is a story that I’ve visited several times before. As long ago as 2009 I wondered Could mergers come back into fashion? Before asking Is the mega-merger falling out of fashion? Even during the boom, people were asking Do takeovers by ‘private equity’ firms destroy jobs?